Numbers appear to reflect Chinese money lured home from overseas by a stable yuan and relatively high onshore rates, rather than significant new interest among foreign buyers prompted by the scheme

Foreign investors increased their holdings of Chinese bonds for a fifth consecutive month in July, but official data showed little evidence that the country’s one-month-old scheme to ease bond market access for overseas investors has had a significant impact on trading.

Holdings of Chinese treasury bonds by overseas investors rose by 37.82 billion yuan (US$5.62 billion) in July to 487 billion yuan, according to Reuters’ calculations based on data from China Central Depository and Clearing Co (CCDC), the official bond clearing house.

Increases in holdings of Chinese treasury bonds and some corporate bonds offset a net decrease in holdings of policy bank bonds.

Data showed that foreign investors increased their holdings of all Chinese bonds by 37.8 billion yuan in July to 841.5 billion yuan. For the first seven months of the year, foreign holdings of Chinese debt rose 62.6 billion yuan.

While the monthly increase in holdings of all Chinese bonds was the highest since September 2016, the numbers appear to reflect Chinese money lured home from overseas by a stable yuan and relatively high onshore rates, rather than significant new interest among foreign buyers prompted by the Bond Connect scheme.

“In the early days, it’s mainly the overseas companies of Chinese institutions that are coming in (through Bond Connect). Later there should be real overseas institutions”

Yields on benchmark 10-year Chinese government bonds were at 3.644% on Thursday, up 98 basis points from lows in October.

“In the early days, it’s mainly the overseas companies of Chinese institutions that are coming in (through Bond Connect). Later there should be real overseas institutions. Overseas investors need time,” said David Qu, markets economist at ANZ in Shanghai.

Described by regulators as a significant step toward increasing cooperation between capital markets in mainland China and Hong Kong, the Bond Connect scheme began on July 3 with the opening of “Northbound” trade, allowing eligible Hong Kong and overseas institutions to buy and sell onshore bonds.

Since then, the programme has been slow to take off as many overseas investors adopt a wait-and-see attitude to increased participation in the onshore bond market.

The 7.05 billion yuan in aggregate first-day trading volumes through Bond Connect, described as “brisk” in a statement by CFETS, represented a small fraction of trades in a market where a single trader chat group can produce daily trade volumes of 10 billion yuan. Regulators have not released additional Bond Connect data since July 3.

In an emailed response to questions from Reuters, a spokeswoman at Hong Kong Exchanges and Clearing did not provide trading data, but said that 24 onshore institutions are participating in the program as dealers, providing quotations to more than 150 overseas institutional investors. Seventy overseas institutions participated in trade on the launch day.

Income Partners, a Hong Kong-based asset manager specializing in Asian fixed income, bought onshore paper through Bond Connect on July 3, but had not made any further trades through the program since then, said Raymond Gui, senior portfolio manager.

“The Bond Connect alone does not increase the chance of potential inclusion much, as hedge funds and interest-rate derivatives remain excluded, at least on paper”

“It’s true that we haven’t traded more after the first day, but that’s because it’s our medium-term allocation and the onshore market hasn’t moved much since then,” he said.

He said that the company remains interested in using the scheme in addition to its existing quota for investing in onshore bonds through the RQFII program, and sees particular value in Chinese government and policy bank bonds.

Market participants say that the potential inclusion of China’s US$9 trillion bond market into major global bond indexes would prompt large inflows into the market, with some arguing that the Bond Connect itself removes some barriers to inclusion.

However, Bank of America Merrill Lynch Rates Strategist Yang Chen said in a note on Wednesday that while it represents a useful addition to existing program, “the Bond Connect alone does not increase the chance of potential inclusion much, as hedge funds and interest-rate derivatives remain excluded, at least on paper.”